Cramer: All is forgiven, Salesforce
Jim Cramer | firstname.lastname@example.org
Not because of anything it did, but because JD.com, a company with fewer profits than Salesforce.com has (mainly none), had a successful initial public offering yesterday.
I believe this market has pretty much lost its mind. Don't worry; it is a jolly, slaphappy mind loss, nothing nefarious. I don't want to draw any conclusions about the overall direction of stocks just because the market has become a gigantic game of ping-pong.
On Wednesday, value was in vogue. We couldn't get enough of the stocks that were undervalued versus the S&P 500. It didn't matter that Salesforce.com had reported an amazing quarter if you care about sales growth. What mattered was that the stock's price-to-earnings multiple is outrageous, and some of the purists out there would argue that it isn't even making money.
Salesforce.com has become the poster child for the most successful company with the least successful stock since the downturn in momentum stocks that began when Salesforce reported its previous quarter, spiked up for a nanosecond, and then began a hideous slide down from $68 that didn't end until the stock hit $49 not that long ago.
The next day? A Chinese Internet company that's growing even faster than Salesforce and losing money hand over fist, JD.com, came public at $19 and immediately went to a premium, at $21.75 and still climbing. JD looks like Amazon.com in that it has to spend, spend, spend to block out all others with the hope that it can begin to make a lot of money. The non-purists looked at the bottom line, where it has decent cash flow, and decided that JD's right to spend and that it doesn't matter that it had a monster price-to-earnings multiple in the outyears.
Momentum stocks pretty much all trade together, in part because of what is known as algorithmic trading--a shorthand for a program that says, "If one of these momentums stocks goes up, they should all go up."
The machines' thinking, so to speak, goes like this: JD's growing aggressively because it has to take advantage of the opportunity that would be wasted if it worried about a near-term profit. Buyers are lapping up that story, taking it to an immediate premium on the IPO. We haven't had many IPOs go to huge premiums of late. That means there's real demand for this kind of company.
So the machines seek like-minded companies. What's one that we know is doing well with that same model? How about Salesforce.com? The company had just come on CNBC's "Mad Money" and said that opportunities are so great that spending aggressively is very necessary.
Salesforce.com is a software-as-service platform. So the machines ask what else looks like Salesforce.com and come up with the other companies that run on the Salesforce.com platform: Workday, Cornerstone OnDemand, and Concur being the best examples.
Dozens of other companies with the JD model then ignite. The 3-D printer companies are all about spending to win. So is Zillow. So is Yelp. Needless to say, so is Amazon.
Next thing you know, we have a rally in all of the momentum highfliers because, well, why not? If JD is loved with a model that's just like the other momentum names, then why not buy all of them too?
And you know what the amazing thing is about this transformation and what defines how whacky this market is? These exact same stocks were being tossed away just one day earlier. There seemed to be no buyers and huge sellers on Wednesday. Now there seem to be no sellers and huge buyers. Again, that makes sense within the confines of the IPO valuation of JD. It will continue making sense until the bankers saturate the market with more JD look-alikes or we get a return to the colossal amount of insider selling we had.
And the value stocks? Value tech loses some luster as the move pours out of those stocks into momentum names. The rest of the market? As usual, unaffected, even as we are told it is just a matter of time before it is.
Disclosures: Cramer's charitable trust has no positions in the stocks mentioned.